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Varchild2008 (85.67)

VOTE NOW! Buy a house or wait?

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September 21, 2011 – Comments (32)

In this scenario you live in an apartment and are looking to buy a home.  You have enough money
to put 20% down on the type of home you desire:


1)  Buy the home at 4.5% mortgage rate?

OR

2)  Wait for the mortgage rate to fall?

32 Comments – Post Your Own

#1) On September 21, 2011 at 8:39 PM, blesto (31.59) wrote:

I vote #1

If I have 20% to put down, I probably have a decent job that's reasonably secure and maybe a supplemental source of income.

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#2) On September 21, 2011 at 8:41 PM, zymok (< 20) wrote:

I don't think they're going much lower. Lock in now.

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#3) On September 21, 2011 at 9:00 PM, amassafortune (29.58) wrote:

Wait if you are intent on getting the best deal, but for anyone who has been planning a home purchase, and if you have a job likely to survive continued weakness, now is not a bad time. Home prices and rates are both low, though both are likely to go even lower. My first mortgage was at 12%, so I'm not going to say 4.5% is too high. I just think rates are going even lower.

Rates will start dropping again after the Fed's action today. In the next couple weeks, you'll see the "lower rate" angle appear in advertisements. There will be a small wave of buyers over the next couple months. When that source of fees begins to dry up, rates will fall even more.

The 8.5 months of unsold homes will not shrink much with a wave of financing because of all the shadow inventory in the market - people who would like to sell, but don't even begin the process because the market is so weak. 

When you but, go with the fixed rate. Don't add unknown variables to your future budget. 

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#4) On September 21, 2011 at 9:08 PM, jwebbzor (< 20) wrote:

#1 Mortgage rates aren't going much lower, however, home prices may.

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#5) On September 21, 2011 at 9:41 PM, HarryCaraysGhost (99.71) wrote:

#1 there are some absolute deals out there.

If I had to do it over again I would've firgured out a way to pay in cash. Trying to refinance into lower rates is a nightmare.

But at 4.5% you don't have that problem. Do you really think it will go to 3.5%. (it's possible but unlikely, and even if it does 4.5 is a damn low rate)

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#6) On September 21, 2011 at 9:56 PM, ikkyu2 (99.32) wrote:

I already voted; I bought the home 18 months ago at 5.125% with 3.5% down and FHA mortgage insurance.  Pretty good deal.  The FHA insurance has more than doubled since that time, making the idea of a refi a wash.

If I had another down payment and an income stream to pay the mortgage, I'd buy another house right now. 

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#7) On September 21, 2011 at 9:57 PM, Varchild2008 (85.67) wrote:

4.5% is actually high as Flagstar had it at 4.0%.

I'd vote #2.

I bought a house and now I my jaw is dropping in disappointment for not waiting for the rates to go lower.

And hence that's my point.  A big reason housing market isn't doing well is lots of people are expecting rates to go lower.

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#8) On September 21, 2011 at 10:01 PM, Varchild2008 (85.67) wrote:

Buying a house isn't as straightforward as my post here makes it look.

Your monthly bill after the first year will skyrocket as naturally there's this hidden thing called an Escrow Minimum.  Your minimum to start with fails to support what you owe in property taxes the next year.

So you will see a sudden jump 1 year from now.

And that's when choosing #1 just isn't realistic.

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#9) On September 21, 2011 at 10:56 PM, HarryCaraysGhost (99.71) wrote:

#8 Absolutley correct!

 I got hit with the same thing. Somewhat shocking since I really did'nt budget for that increase. I thought I would be paying less then rent but it did'nt work out that way.

 

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#10) On September 21, 2011 at 11:01 PM, davejh23 (< 20) wrote:

I'm no expert, but from what I've read, many don't believe "operation twist" will lower mortgage rates at all.  Recent articles have pointed out that banks have been keeping rates higher than they would typically be based on currently long-term bond yields...they see little difference in loan applications whether rates are 4.0% or 4.5%, so they're charging the higher rate (unless you have 20% down, stellar credit, etc...).  Besides that, a flattened yield curve is bad for a bank's ability to make profitable loans.  Unless short term yields fall along with long term yields, mortgage rates aren't likely to fall.  If short term rates rise, we might even see mortgage rates rise.  Didn't mortgage rates rise with QE2?

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#11) On September 21, 2011 at 11:51 PM, BillyTG (29.20) wrote:

RENT don't buy.

Yes, right now is probably about the lowest mortgage rate you'll ever see. Trying to "catch the falling knife" might get youy, what, .25%, .5% lower? And that's peanuts compared to a 10%+ rate.  But buying at a much higher mortgage rate might get you a much cheaper house, and you can handle a much bigger down payment then, negating some of that. There's no easy answer for your question.

Here's why you might wait:

1. Demographics. There are not enough new people to buy up the old peoples' homes. Younger generations have fewer people than the Baby Boomers. As Baby Boomers die off, they are not replaced by a bigger younger generation or even on a one for one basis, for about another 20 years. That leaves excess inventory, increasing supply.

2. A rising mortgage rate will crush prices. You seem to be concerned primarily about mortgage rates as if prices will stay static or increase. Geuess what will happen to home prices as soon as interest rates are allowed to free float and be determined by the market?  They will go WAYYY up. Look what happened in the early 80s. We'll probably see something like that again. If mortgage rates go way over 10%, the demand to buy homes will plummet. Combined with an oversupply, you have a combination for sinking home prices. Your cheap mortgage rate now will be great but your house might be worth 30% less.

3. Shadow inventory. Estimates vary, but there are probably well over 10 MILLION vacant homes, with values artificially inflated.  How are they artificially inflated? By artificially low mortgage rates, by artificially suppressed foreclosure rates, among other things.

4. There is a generational movement to avoid homes, which will cause that oversupply to remain, hurting overall house appreciation even more.  Americans are converting to Euro-style lifestyles, that is, living with parents longer, moving in with boyfriends/girlfriends earlier to save on expenses, avoiding buying altogether, buying/renting smaller homes and apartments, etc. Buying an apartment/condo would probably get you a better return than a house. College grads are already tens of thousands in debt, so they aren't exactly excitied to assume what amounts to a second house mortgage.

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#12) On September 22, 2011 at 3:26 AM, BillyTG (29.20) wrote:

Good timing. Yahoo just posted an AP article about young people living at home: http://news.yahoo.com/low-jobs-mobility-marriage-young-adults-041513388.html

 

The best advice: Clint Eastwood, in Million Dollar Baby, tells Hilary Swank that if she buys a house, to pay 100% in cash.  No mortgage. 

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#13) On September 22, 2011 at 3:32 AM, BillyTG (29.20) wrote:

Correction my post #11. In bullet 2, I meant that mortgage rates "will go WAYYY up," if allowed to be determined by the market, which will cause house prices to go way down.

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#14) On September 22, 2011 at 5:27 AM, dbjella (< 20) wrote:

#8

Make sure you check with you lender.  You don't always have to escrow.  I didn't escrow on my last two mortgages.  BUT, that means you have to set aside money for insurance and real estate taxes :)

When I worked in the mortgage business I was amazed at home many people had no idea we paid their insurance and property taxes.  

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#15) On September 22, 2011 at 7:21 AM, dbtheonly (< 20) wrote:

dbjella,

 I'm in favor of mortages for the very reason you mention. The escrows force me to budget for the taxes & insurance. The Mortgager pays me minimal interest, but the headache of getting bills of thousands of dollars is avoided.

I've never heard of not escrowing with a mortgage, but I'll defer to you. Why would you not want to?

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#16) On September 22, 2011 at 8:39 AM, imobillc (< 20) wrote:

Option # 3:

Wait for prices to drop to even more!

We are not at a bottom yet.

 

Mars 

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#17) On September 22, 2011 at 9:07 AM, blake303 (29.24) wrote:

#1. Just bought and fixed at 4% paying less than I rent for.

In response to #8 - Increases in property taxes are passed on to renters anyway. Most leases are 6 to 12 months, so renters are not immune to increases in their annual budget for housing.

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#18) On September 22, 2011 at 9:10 AM, TDRH (99.68) wrote:

Depends, is home ownership somethign you want, or something you feel you have to do?   I you want to buy a home, not as an investment, but because you want it then #1. 

With 20% down in some areas you will have the option to have your property taxes  and insurance taken out every month, or pay lump sum every year.   Takes a little  planning, but weseparate these items from our mortgage.

 As for waiting for the mortgage rate to drop, I cannot say.  4.5% seems a little high for the current rate, maybe shop that around a little bit to get the best deal.   15 year mortgages offer lower rates.

 

 

 

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#19) On September 22, 2011 at 10:46 AM, leohaas (32.73) wrote:

Question for this hypothetical scenario: is your credit score 740 or up? If so, lenders will line up for you. Current rates are 4.1% for 30 years, 3.33% for 15 years. Don't expect that to go much lower.

However, if your credit score is below 740, forget about buying now. Focus on improving your credit score so you can secure a mortgage next year or the year after.

Regarding demographics: they aren't bad at all.  Immigration will more than make up for the baby boomers dying (see here for instance, and this assumes 'low net immigration"). People need to live somewhere.

Stop looking at a home as primarily an investment. It is primarily a place to live. Don't expect the boom days to return any time soon. When deciding whether to buy or rent, let factors such as affordability, availability of desired homes in both the rental and sale markets, and how long you plan on staying in the same place be your guidance.

Finally, if the sky really falls, we're all dead. And if you happen to survive, just walk away from your house.

Disclosure: long a house at the time of writing, but looking to sell, so I can buy one closer to work.

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#20) On September 22, 2011 at 11:21 AM, mm5525 (< 20) wrote:

I was a mortgage broker for 10+ years and simply would like to offer some general mortgage advice: I constantly advised anyone that would listen to never escrow your loan. If you are only putting 3.5% or <20% down, you have no choice but to escrow, but if the option is on the table, pay the .125% hit to the rate for waiving escrows and have a truly fixed payment that truly will never change. You can manage your HOI and property taxes entirely how you wish, even putting it on a credit card in case of an emergency, rather than be stuck with a payment the servicer will constantly raise and often mismanage. If you change HOI carriers, it is very messy to get your servicer to adjust the payment. So not only do you not pay Private Mortgage Insurance with 20% or more down, you can also waive escrows.  

Also, avoid FHA at all costs. Go conventional if your credit is good. Use FHA as a last resort. The FHA Upfront Mortgage Insurance Premium is a doozy.

  

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#21) On September 22, 2011 at 12:13 PM, EnigmaDude (87.65) wrote:

I too, bought a house about 18 months ago.  Put down 5% and got FHA at 5.25%.  Now about to refi and my appraisal just came in $25k higher than it appraised for last year when I bought the house. My credit score is only about 700 so I will stick with FHA to get 4.25% interest (conventional loan would be at 4.875%).  Even with the added MI premium on the new FHA loan I am taking 6k in cash out to pay for the central air that I added and will still save more than $50k over the life of the loan while keeping my monthly payment about the same as it was.

So it depends on a lot of factors.  Even though home values have gone down nationally, my local area has remained stable, and in my case I put a lot of work into my house to increase the value, which has paid off for me.

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#22) On September 22, 2011 at 12:20 PM, mdk0611 (55.09) wrote:

Follow-up questions:

1.  Where, and what condition is the local market in?

2.  Is it likely you'll be living there for at least 5 years?

3.  What is the after tax cost as opposed to renting?

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#23) On September 22, 2011 at 1:15 PM, buffalonate (94.96) wrote:

I vote buy.  The housing glut makes it easy to find a house you like at a very reasonable price.  The incredibly low interest rate is hard to pass up.  As long as you know your job is stable now is definitely a good time to buy.

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#24) On September 22, 2011 at 1:17 PM, devoish (97.60) wrote:

If mortgage rates matter to you, then the worst time to buy a house is when they are low.

If they do not matter, then when they are low is still the worst time.

Here is a little tidbit from 2007 that explains why that is true, and why I respect Dwot. Then consider that nothing has changed to grow paychecks, they are still falling - ask the Wisconsin teachers union. High school grads do not make enough to buy houses at todays prices plus interest. Most College grads do not, plus they have debt to pay off.

http://caps.fool.com/Blogs/rate-reductions-will-do-little/24600 

And remember to rec Dwots blog, all our recs from back then were reset to zero in some sort of CAPS programming reshuffle.

Best wishes,

Steven

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#25) On September 22, 2011 at 3:52 PM, Schmacko (58.06) wrote:

Varchild,

You could try and refinance to reduce payments.  If the refi fees are an issue you can also look at taking a slightly higher (yet sill lower than your current) rate for negative points, which is then credited against your closing costs.

USAA, for example, is currently offering 3.875% rates for 30 years and -2.15 points for a half % higher at 4.375% (4.125% is -1.15 points).  If you're at 5.5% or higher you'd still be lowering your interest rate by over 1% and would probably be bringing very little to nothing to the table for closing costs.

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#26) On September 22, 2011 at 4:27 PM, AvianFlu (32.65) wrote:

As someone who was a Realtor for 15 years I have mixed feelings on buying a house right now. There is clearly a good chance that house prices will continue to decline. However, interest rates are about as low as they are going to get. If they go up at all that will radically increase house payments. With the current dollar debasement it seems likely that interest rates will be going quite high at some point. But when that happens house prices are forced down or else nobody will be able to qualify for a loan. Tough call.

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#27) On September 22, 2011 at 5:41 PM, Zundels (79.80) wrote:

I am refinancing my house right now thru Flagstar Bank, and there current rates are 3.99% on a 30 year fixed with no points. So if anyone is really looking into it right now I wouldnt be paying 4.5%.

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#28) On September 22, 2011 at 8:10 PM, vrpirata (< 20) wrote:

Buy buy buy. Don't worry about trying to time the bottom, you will only be able to identify the bottom several months later.

When your future mortgage monthly payment is below the equivalent rent for that property, it means it is time to buy.

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#29) On September 22, 2011 at 8:17 PM, vrpirata (< 20) wrote:

Increase in interest rates may make housing more expensive and put pressure on house prices, true. However, our future reads inflation (or hyper inflation), and that will push rents and home prices up.

Knowing the fed slow reaction to inflation, inflation will be pushing prices up for rents and house prices at a faster rate than the Fed trying to counter act with higher interest rates.

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#30) On September 22, 2011 at 8:53 PM, familyfund1 (< 20) wrote:

vrpirata (< 20) wrote:

Increase in interest rates may make housing more expensive and put pressure on house prices, true. However, our future reads inflation (or hyper inflation), and that will push rents and home prices up.

Knowing the fed slow reaction to inflation, inflation will be pushing prices up for rents and house prices at a faster rate than the Fed trying to counter act with higher interest rates.

Thanks. I was also wondering about that.

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#31) On September 22, 2011 at 10:03 PM, dwot (49.32) wrote:

It isn't just about interest rates.  It is also very much about price.

I don't know what that  Escrow Minimum thing is about.  I just had a look on the web.  We don't have such a thing in Canada.  We just pay our property related bills without a third party taking a cut... 

I bought my house, $140k for a 3000 sq ft home that I found out was built with the idea of adding a basement suite one day.  I added a basement suite.

The world is so small at times.  I was chatting with the second owner of my home, who bought it from the builder, today at this conference I'm at in Yellowknife.  This was the 3rd day of the conference and I only figured out in the last hour or two of it that this guy used to own my home...  He mentioned he'd taught in Ft Liard for 10 years, so I immediately asked...

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#32) On September 26, 2011 at 12:13 AM, giantSwan (< 20) wrote:

Here in NYC, I'd say wait. Prices still seem inflated to me.

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